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Relative Performance, Risk and Entry in the Mutual Fund Industry

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Author Info
Lóránth, Gyöngyi
Sciubba, Emanuela

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Abstract

This Paper constitutes a first attempt to analyse the impact of the emergence of new funds on portfolio decisions of mutual fund managers who are evaluated on the basis of relative performance. Recent theoretical literature has pointed to the inefficiencies in portfolio selection caused by relative performance evaluation of fund managers. We find that the ongoing process of creation of new funds, by posing an entry threat to the incumbent fund managers, greatly alleviates these inefficiencies. Hence the transitory market structure that characterizes the mutual fund industry could explain why relative performance evaluation is widely in use.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3504.

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Date of creation: Aug 2002
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Handle: RePEc:cpr:ceprdp:3504

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Related research
Keywords: family of funds; fund management industry; ranking objectives; relative performance evaluation;

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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References listed on IDEAS
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  1. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March. [Downloadable!] (restricted)
  2. Goriaev, Alexei & Nijman, Theo E. & Werker, Bas J. M., 2005. "Yet another look at mutual fund tournaments," Journal of Empirical Finance, Elsevier, vol. 12(1), pages 127-137, January. [Downloadable!] (restricted)
  3. Luís M. B. Cabral, 2003. "R&D Competition when firms Choose Variance," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 12(1), pages 139-150, 03. [Downloadable!] (restricted)
  4. Ahmed, Parvez, 2001. "Forecasting correlation among equity mutual funds," Journal of Banking & Finance, Elsevier, vol. 25(6), pages 1187-1208, June. [Downloadable!] (restricted)
  5. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October. [Downloadable!] (restricted)
  6. Goriaev, A. & Palomino, F. & Prat, A., 2000. "Mutual fund tournament : risk taking incentives induced by ranking objectives," Discussion Paper 94, Tilburg University, Center for Economic Research. [Downloadable!]
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  7. Emanuela Sciubba, 2000. "Relative Performance and Herding in Financial Markets," Econometric Society World Congress 2000 Contributed Papers 1570, Econometric Society. [Downloadable!]
  8. Khorana, Ajay & Servaes, Henri, 1999. "The Determinants of Mutual Fund Starts," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(5), pages 1043-74.
  9. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
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  10. Busse, Jeffrey A., 2001. "Another Look at Mutual Fund Tournaments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 53-73, March. [Downloadable!]
  11. Taylor, Jonathan, 2003. "Risk-taking behavior in mutual fund tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 50(3), pages 373-383, March. [Downloadable!] (restricted)
  12. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March. [Downloadable!] (restricted)
  13. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 433-46, July. [Downloadable!] (restricted)
  14. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-81, June.
    Other versions:
  15. Hans K. Hvide, 2002. "Tournament Rewards and Risk Taking," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 877-898, October. [Downloadable!]
    Other versions:
  16. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn. [Downloadable!] (restricted)
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